A recent Law 360 article by Joshua Wurtzel, “A Lawyer’s Guide To Collecting Fees From Nonpaying Clients,” reports on collecting unpaid fees.  This article was posted with permission.  The article reads:

You've done the work and sent the bill, but haven't been paid. What do you do?  This is unfortunately a question that lawyers, from solo practitioners to BigLaw partners, confront all too often.  But most lawyers struggle with the answer.  And even worse, many end up doing nothing — leaving significant receivables on the table from clients who have the ability to pay.  Struggle no longer.  Here, I offer some recommendations on how to deal with a nonpaying client. The article focuses on the law on account stated in New York.  These principles and advice are generally applicable in most U.S. jurisdictions, though you should of course consult the specific law in your jurisdiction.

Make Sure Your Retainer Agreement Gives You Adequate Protection

Good collection starts with a good retainer agreement.  There are several important clauses any retainer agreement should have.

Thirty Days to Object

Your retainer agreement should include a clause stating that if a client has an objection to an invoice, the client must make a specific objection in writing within 30 days.  Courts have upheld these types of clauses, and have further held that a client that fails to make a specific, timely objection in accordance with this clause waives objections to the invoice.

Fee Shifting

Many lawyers avoid suing clients for unpaid fees because the time spent doing so can be better spent on other, billable tasks.  But if you include a fee-shifting clause in your retainer agreement, a nonpaying client could end up being responsible for fees you incur in bringing the suit.  Make sure, however, that the fee-shifting clauses run in favor of the client as well if he or she is the prevailing party, or else it will be unenforceable.

Choice of Forum and Acceptance of Service of Process

Your retainer agreement should also include a forum selection clause in the state in which you practice so you don't have to go out of state to sue a nonpaying client.  And it should also include a clause stating that the client agrees to accept service of process by mail or email, in case you have trouble serving the client personally.

Rely on the Retaining Lien and Charging Lien

New York law strongly favors attorneys who are stiffed by their clients.  So there are some tools you can use to try to collect without having to bring a lawsuit.

Retaining Lien

When a client has an outstanding balance with his or her former lawyer, the lawyer can assert a retaining lien over the client's file. This allows the lawyer to refuse to turn over the file to the client or his or her new counsel until the outstanding balance is paid or otherwise secured.  To lift the retaining lien, the former client must either pay the amount owed to the lawyer or post a bond for that amount.

Charging Lien

Under Section 475 of the New York Judiciary Law, "from the commencement of an action," the lawyer who "appears for a party has a lien upon his or her client's cause of action," which attaches to a verdict, settlement, judgment or final order in his or her client's favor.

This section gives the lawyer a lien on the proceeds of the former client's case to the extent of the amount owed to the lawyer, with the result that no proceeds can be distributed to the former client or his or her new counsel until the former lawyer is paid.

In 1995, the New York Court of Appeals in LMWT Realty Corp. v. Davis Agency Inc. held that this lien "does not merely give an attorney an enforceable right against the property of another," but instead "gives the attorney an equitable ownership interest in the client's cause of action."

Sue for Account Stated

If all else fails and you need to sue a nonpaying client, the account stated cause of action will be your best friend.  Indeed, in New York, this cause of action allows a professional services provider to sue a client for nonpayment of an invoice if the client has retained the invoice for at least a few months and has failed to make timely, specific, written objections.  This cause of action thus provides lawyers with a substantial tool to pursue a nonpaying client.

Invoice Requirement

To state a claim for account stated, you must show only that you sent the invoices to the client and the client retained them — usually for at least a few months — without making specific, written objections.  It is thus important to maintain a record of when invoices are sent and to whom — ideally by email to an email address the client gave to receive invoices.

Oral Objections

Generally, a client must make specific, written objections to an invoice; general or oral objections will not be enough to defeat a claim for account stated. Nor will general claims by a client that he or she is dissatisfied with a particular outcome suffice.

Reasonableness of Fees

Many nonpaying clients will defend against a nonpayment suit by claiming that they were overbilled or that the quality of the work was not to their liking.  But if these objections are not made in a timely way, with specificity and in writing, courts generally hold that they are waived.

This is significant for a lawyer pursuing a nonpaying client, as most clients will defend by claiming that there was something wrong with the work done by the lawyer.  And so if an account is stated by virtue of the client's retention of the invoices, the reasonableness of the fees and the quality of the work has no bearing on the merit of the account stated claim.

Underlying Agreement to Pay

While account stated is a powerful cause of action, it works only if there is an underlying agreement to pay for the services rendered.  So a person who randomly sends out invoices without having an underlying agreement with the recipients of the invoices can obviously not rely on account stated.

But if you have a retainer agreement that properly covers the scope of the work you will be doing, you shouldn't have a problem.  Nor is there a requirement that the client has agreed to pay for the specific invoices at issue, as long as the client has agreed to pay for your services generally.

The Dreaded Malpractice Claim

Most nonpaying clients faced with a lawsuit by their former lawyer will assert counterclaims for malpractice — even if the malpractice claim has no merit.  While the lawyer must, of course, still deal with the malpractice claim, courts generally go out of their way to sever a lawyer's account stated claim from a nonpaying client's malpractice counterclaim.  This is especially so if the alleged malpractice relates to different work from what is at issue on the unpaid invoices.

Further, as a strategic matter, unless the malpractice counterclaim has merit, most nonpaying clients will drop it after the lawyer obtains a quick judgment on summary judgment at the outset of the case.

Conclusion

Suing a former client is never pleasant, and is a last resort after the attorney-client relationship has broken down. But using efficient, streamlined ways to collect from nonpaying clients can allow a law firm to provide greater value to the rest of its clients.

Joshua Wurtzel is a partner at Schlam Stone & Dolan LLP in New York.

A recent Law 360 story by Ryan Harroff, “Judge Axes Benicar Fee Suit. Says Firm Didn’t Overcharge” reports that Mazie Slater Katz & Freeman LLC beat a suit that claimed it overcharged its clients in multidistrict litigation over gastrointestinal injuries related to blood pressure drug Benicar and its generic Olmesartan after the New Jersey court found a state attorney fee rule did not apply to the MDL.  A New Jersey federal judge granted Mazie Slater's motion to dismiss the proposed class action, writing that the nearly $9 million award for the firm was "well within the reasonable and equitable percentages of Third Circuit examples."  The court agreed with the firm's argument from its dismissal bid that a state rule on attorney fees that served as the backbone of the action does not apply to mass tort MDL cases.

According to the court's opinion, named plaintiff Anthony Martino misapplied New Jersey Court Rule 1:21-7(i), which requires firms to aggregate class action fees based on individual client recoveries and seek court approval for fees over $3 million, by claiming that he and his proposed class members all had "substantially identical liability issues," a requirement for the rule, since they were all litigants in a New-Jersey resident-only multicounty consolidated litigation running parallel to the broader Benicar MDL.

According to the opinion, "there can be no rational, medical, logical, or legal justification why the claims of a subset of Olmesartan registrants could be interpreted as having substantially identical liability based merely on the fact they arose in the MCL."

The product liability MDL and MCL in question sought to hold Daiichi Sankyo Inc. and Forest Laboratories Inc. accountable for injuries suffered by Benicar and Olmesartan users.  The MDL settled initially for $300 million in August 2017 and the deal later grew to $380 million after triple the expected class members registered, according to the opinion.

Mazie Slater got $8.9 million of the total attorney fee allotment from the deal, and Martino accused the firm of running afoul of the New Jersey court rule in his November complaint, which claimed legal malpractice, unjust enrichment and conversion after firm partner Adam Slater allegedly failed to tell his clients that the firm would get "substantial fees and costs for the same, or substantially same, work that he had performed for each client and for which he received a full fee under the individual retainer agreements."

The rule does not apply to MCL or MDL consolidations, the court wrote, citing a lack of case law to support its application and the "very different and the very specific factual details" of each consolidated injury, which, according to the opinion, undercut Martino's argument the MCL litigants issues are substantially identical.

Bruce Nagel of Nagel Rice LLP, counsel for Martino and the proposed class, told Law360 that it is "nonsense" for the court to say the MCL plaintiffs do not all arise from the same liability issues since they all come from the same drug.  Nagel also said the MCL plaintiffs all had retainer agreements with Mazie Slater that included the New Jersey court rule and that he believed the Third Circuit would find that rule enforceable under those retainers.

Adam Slater of Mazie Slater Katz & Freeman LLC, who is both a named defendant and counsel for himself and the firm, told Law360 that the court's decision was "absolutely correct," and that there are many variances of liability issues in the consolidated cases, such as whether a plaintiff took the drug before or after a warning about potential side effects was added in 2013.  Slater said variances like that are why the New Jersey court rule does not apply for mass torts.

"What we did here is consistent with what every New Jersey lawyer litigating mass torts in the state and federal courts of New Jersey has been doing for over 40 years, calculating fees, and it's very clear that that rule does not apply in a mass tort setting like the Benicar case or the other mass tort cases that are routinely litigated in New Jersey," Slater said.

A recent Reuters story by David Thomas, “Ex-Client Wans $22 mln From Brown Rudnick, Saying Lawyers Overbilled” reports that an Austrian multinational construction company went on the offensive in a fee dispute with U.S. law firm Brown Rudnick, claiming the firm routinely overbilled it and demanding $22 million.  Brown Rudnick sued Christof Industries Global GmbH in September, alleging the industrial plant builder owed $8 million in attorney fees and interest from an international arbitration over a failed construction project.

But the law firm racked up more than $6 million in fees after promising in writing to not exceed a $2 million fee estimate, Christof alleged in its countersuit, filed in Boston federal court.  The law firm improperly overbilled, Christof alleged, saying one attorney billed more than $145,000 for 231 hours preparing to examine one witness.  The law firm billed more than 40 hours for assembling binders, the company said.

"In a number of time entries that verge on satire, Brown Rudnick attorneys even billed for drafting and corresponding about a proposal for their 'binder compilation strategy,'" Christof said in its suit.

The dispute stems from Brown Rudnick's work arbitrating a conflict arising from a Christof subsidiary's work as a contractor during the construction of a fiberboard production plant in South Carolina.  Christof said it signed an agreement with the firm so that its legal costs would not exceed $40,000 a month, plus a $200,000 retainer up front.  But it said Brown Rudnick billed more than $250,000, not including the retainer, just in its first month.

A panel awarded Christof more than $24.5 million in damages in the underlying arbitration, which was offset by about $20 million in advanced contract payments the company had received.  The final award was for $6.68 million.